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Former Treasury Secretary Lawrence Summers criticized the current U.S. Treasury Secretary Scott Bessent for weighing too directly on the direction of interest rates, something he believes could blur the lines between fiscal and monetary polices.
Summers, who served as the Treasury Secretary under President Bill Clinton, says that he is surprised to see Bessent “be that prescriptive on interest rates,” noting that usually administrative officials aren’t involved in such judgements, while adding that he’s “not sure it’s helpful for the Administration to be publicly prescribing on monetary policy.”
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He says that any model of monetary policy must rest “on a judgment about what the neutral interest rate is,” which is the level that allows the economy to sustain full employment without fueling inflation.
He also cites “a judgment about inflation expectations” as another requisite for arriving at a monetary policy model, saying that this is how he would approach it.
Summers also points to multiple forces that he believes are driving higher demand for capital, including “substantially elevated deficit spending,” a surge in “data center spending,” reduced U.S. trade deficits, and “higher asset prices” that limit the flow of savings.
Altogether, he says, these dynamics suggest that “neutral interest rates have risen quite substantially,” noting that under such circumstances Bessent’s stance on steep rate reductions was misplaced.
In such a case, he notes, you shouldn’t be “prescribing [a] 175 basis point cut in rates unless we see a recession.”
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Last week, Bessent argued that the current interest rates were too restrictive, saying that “we should be 150-175 basis points lower on the fed funds now,” noting that had the Bureau of Labor Statistics been more accurate recently, the Federal Reserve would have cut rates in June or July.
